Chapter 11: Pensioner Income and Expenditure, (2012 Edition)

• In 2010/11, pensioner couples received average income of £610 per week, compared with £345 per week for single men pensioners and £279 per week for single women pensioners.

• In 2010/11, the average weekly income of couples in the ‘under 75’ category was 32 per cent higher than that of couples in the ’75 or over’ category (Figure 11.1). A key reason for this is that younger pensioner couples are more likely to have some income from employment than older pensioner couples.

• Average gross pensioner incomes increased by an estimated 50 per cent in real terms between 1994/95 and 2010/11 (Figure 11.2).

• Average incomes conceal considerable variations between poorer and richer pensioners. In 2008-11, the median net income of pensioners in the highest income quintile was three to four times higher than that of pensioners in the lowest income quintile (Figure 11.3).

• The largest source of income for pensioners is ‘benefit income’, which includes state pension income and benefits such as housing and disability benefits. Occupational pensions are also a significant source of income (Table 11.4 and Figure 11.5).

• In 2010/11, median income from occupational pensions – for those with such pensions – was £172 per week for pensioner couples and £81 per week for single pensioners. Median income from personal pensions, for those with such pensions, was £42 per week for couples and £33 per week for single pensioners (Figure 11.6).

• In 2010, the average weekly expenditure of households headed by someone aged 65 to 74 was £365, of which 33 per cent was spent on food and non-alcoholic drink, domestic energy bills, housing and council tax/domestic rates. For households headed by someone aged 75 or over, average expenditure was £240 per week, of which 41 per cent was spent on these items (Table 11.7).

This chapter examines the income and expenditure of pensioners. In 2010/11, there were 8.70 million ‘pensioner benefit units’ according to the Pensioners’ Incomes Series published by the Department for Work and Pensions. Single pensioners accounted for more than half of this total (4.55 million), and most of these were single women (3.35 million).

The median is the preferred measure of central tendency or ‘average’ for this chapter as the data distributions tend to be skewed to the right. This is because a small proportion of individuals have very high pensioner income and expenditure. In unequal distributions, the mean is likely to be influenced by high values, so it does not reflect the experience of most individuals. The median has been used where available, although in many cases the level of detail presented was not available in the form of medians.

The Pensioners’ Incomes Series measures the income of ‘pensioner benefit units’ defined by DWP as “a single adult over state pension age or married or cohabiting pensioners where one or more are over state pension age”. Prior to April 2010, State Pension Age (SPA) was 65 for men and 60 for women. For 2010/11, women are defined to be over SPA based on date of birth and date of interview. In the Pensioners’ Incomes Series, some benefit units are part of larger households – for instance where pensioners are living with relatives – but the income of the other members of the household is not considered here.

The Pensioners’ Incomes Series defines ‘pensioner couples’ as two married or cohabiting adults where one or more are of SPA or over. Some of the couples in the series are mixed status (one person below and one above SPA). A ‘single pensioner’ is a single man or a single woman over the relevant SPA. Although most pensioners have retired, some still work full-time or part-time (see Pension Trends Chapter 4).

The income discussed in this chapter is that of single pensioners and couples. The data comes from the Pensioners’ Incomes Series, which is based on the Family Resources Survey (FRS).

Pensioner units where the head of the benefit unit is less than five years over SPA are described as ‘recently retired’. Pensioners in this group are most likely to be still in employment (including self employment).

Estimates from the 2010/11 Pensioners’ Incomes Series show that 26 per cent of recently retired single pensioners were in receipt of income from earnings (including earnings from self employment), compared with 8 per cent of all single pensioners.

For pensioner couples, 36 per cent of recently retired couples were receiving income from earnings, compared with 29 per cent of all pensioner couples.

Figure 11.1 shows that the mean gross (pre-tax) income of pensioner units in 2010/11 was higher for those where the head of the unit was under 75 than for those where the head of the unit was 75 or over. The difference was particularly clear for couples: the average weekly income of couples in the ‘under 75’ category was 32 per cent higher than that of couples in the ‘75 or over’ category.

One of the reasons for this is that younger pensioners are more likely to have income from employment than older pensioners. This is particularly the case if one member of a pensioner couple is below SPA, which is more likely in the ‘under 75’ and ‘recently retired’ categories than for the ’75 or over’ category. See Chapter 5 of The Pensioners’ Incomes Series 2010-11 (DWP, 2012) for information on ‘mixed status couples’ (couples where one partner is above SPA and one is below).

Another reason is that average earnings have increased more quickly than prices in recent years with the result that newly retired pensioners with salary-related pensions generally receive a higher pension than someone in an equivalent job who retired several years earlier with the same pension entitlement.

The mean gross incomes of all pensioner units increased from £297 per week at 2010/11 prices in 1994/95 to £446 per week in 2010/11 (Figure 11.2). Data before 2002/03 is for Great Britain whereas data after this year is for the United Kingdom, but this has made little difference to the results. According to The Pensioners’ Incomes Series 2005/6 (Revised): “The results for Great Britain and the United Kingdom are nearly identical and the move to a United Kingdom basis made no significant difference to any of the main Pensioners’ Income results or growth rates”.

On average, in 2010/11 the incomes of pensioner couples (£610 per week) were more than twice the incomes of single pensioners (£296 per week). Single women pensioners, with £279 per week, were on lower average incomes than single men pensioners, with £345 per week.

Mean gross pensioner incomes increased by an estimated 50 per cent in real terms between 1994/95 and 2010/11. The real increase in average gross pensioner incomes is calculated in the Pensioners’ Incomes Series by deflating the nominal increase by the Retail Price Index excluding Council Taxes/rates.

The increase in average gross pensioner incomes may seem surprising, given that during this period the basic state pension has been linked to prices, which have risen more slowly than earnings. The main reason for the increase is that occupational pensions have grown in importance during this period (see: Sources of income). However, ‘average’ growth figures conceal considerable variations between the experience of poorer and richer pensioners, as the following analysis shows (see also Pension Trends Chapter 13).

When looking at income distributions, comparisons are most commonly made on the basis of the differences between income quintiles. Quintiles divide the data, ranked in ascending order, into five equal parts – from pensioners with the lowest incomes in the bottom quintile group to those with the highest incomes in the top quintile group. Figure 11.3 shows median net income by income quintile for pensioner couples and single pensioners in 1998/01 and 2008/11. Net income estimates provide a more consistent measure of relative standards of living than gross income.

Figure 11.3 shows that there are big differences between quintiles, with couples in the highest income quintile group receiving median net income of £815 per week (at 2010/11 prices) in 2008-11, which was nearly four times that of those in the lowest income quintile group (£221 per week in 2010/11 prices).

Single pensioners in the highest income quintile group received median net income which was around three times that of single pensioners in the lowest income quintile. The middle and upper income quintiles groups are more likely to include pensioners who are still working, or whose spouse or partner is still working.

Pensioner income may be derived from various sources: state pensions and benefits, private pensions, employment income and income from investments. Table 11.4 shows the main income sources for pensioner couples and single pensioners in different age groups.

The largest source of income is ‘benefit income’, which includes the basic and additional state pensions, widow's pension and widowed parent's allowance; income related benefits (pension credit, housing benefit, council tax benefit and social fund grants) and tax credits; disability benefits; winter fuel payments; and carer's allowance. State pensions and benefits are particularly important for those aged 75 or over, comprising nearly half of mean gross income for pensioner couples and 65 per cent of mean gross income for single pensioners in this age group in 2010/11.

Income from occupational pensions is also significant, accounting for nearly a quarter of mean gross income for single pensioners and over one-quarter of mean gross income for pensioner couples in 2010/11 (Table 11.4 and Figure 11.5). Personal pensions accounted for only a small proportion of mean gross income.

There was a marked increase in occupational pension provision by employers in the 1950s and 1960s and many of these employees are now retired. Pensioner couples, in particular, are benefiting from occupational pensions. Some 67 per cent of pensioner couples and 55 per cent of single pensioners received occupational pension income in 2010/11.

Figure 11.5 shows that single women are more dependent on state pensions and benefits than single men pensioners. In 2010/11, 63 per cent of the mean gross weekly income of single women pensioners came from ‘benefit income’, compared with 50 per cent for single men. Occupational pension income accounted for 22 per cent of the total for single women, compared with 29 per cent for single men.

There are a number of reasons for the differences between single men and women pensioners. Women generally have less opportunity to build up pension entitlement during their working life because of lower pay and greater likelihood of discontinuities in their employment history. Also, a proportion of single women pensioners are widows. The level of occupational pension received by a widow is generally only half the level of the pension received by the couple when the man was alive.

In 2010/11, median income from occupational pensions, for those receiving income from this source, was £172 per week for pensioner couples. This represents an increase of 26 per cent in real terms since 2000/01 (Figure 11.6).

The gains were slightly higher for single pensioners: their median income from this source rose by 32 per cent between 2000/01 and 2010/11. However, there are big differences in absolute terms between pensioner couples and single pensioners.

For single pensioners in 2010/11, median income from occupational pensions, for those receiving income from this source, was only £81 per week. Many single pensioners who receive income from occupational pensions are widows receiving a survivor’s pension, which is usually around half of the pension paid to their husband or partner.

Personal pensions are a more recent development than occupational pensions, having been introduced in 1988 (see Pension Trends Chapter 1). Only 24 per cent of pensioner couples and 10 per cent of single pensioners received personal pension income in 2010/11. Median income from personal pensions is lower than for occupational pensions (Figure 11.6).

There was a peak in 2001/02, when median income from personal pensions (in 2010/11 prices) reached £56 per week for pensioner couples and £44 per week for single pensioners. While median income for both categories has fallen in 2010/11, there is no clear trend over time. In 2010/11, median income from personal pensions was £42 per week for pensioner couples and £33 per week for single pensioners.

The second part of this chapter explores data from the Office for National Statistics’ Living Costs and Food Survey which shows the differences in expenditure patterns between different age groups and different types of retired household.

Table 11.7 shows that in 2010, the latest year available, household expenditure was lowest for households where the household reference person (see ‘Pension Trends Glossary’) was aged 75 or over. This is partly explained by the relatively high proportion of single person households in this age group. Households in the 75 or over age group have on average 1.4 persons compared with 2.2 persons on average in households where the reference person was aged 50 to 64, and 1.8 persons in households of the 65 to 74 age group.

However, average expenditure per person is also lower in the older age groups: in the 75 or over age group, average expenditure per person per week in 2010 was £173, compared with £233 in the 50 to 64 age group and £208 in the 65 to 74 age group. Possible causes of this decline in consumption with age are the reduction in income as people get older and constraints imposed by lack of mobility or ill health, which make it harder to access local shops and other facilities.

Patterns of expenditure also change with age. Table 11.7 shows that the proportion of total expenditure allocated to food and non-alcoholic drink, domestic energy bills and council tax (or domestic rates) rises with age. This is because a certain amount of expenditure on these items is essential for older people. By contrast, older person households spend a smaller proportion of the total on mortgage interest payments than middle aged households.

In 2010, the average weekly expenditure of households headed by someone aged 65 to 74 was £365, of which 33 per cent was spent on food and non-alcoholic drink, domestic energy bills, housing and council tax or domestic rates. For households headed by someone aged 75 or over, average expenditure was £240 per week, of which 41 per cent was spent on food and non-alcoholic drink, domestic energy bills, housing and council tax or domestic rates.

Figure 11.8 shows expenditure on housing in 2010. Here, expenditure on housing comprises all categories of housing expenditure, including those classified as ‘other expenditure’ in Table 11.7, or excluded altogether from Table 11.7.

Total housing expenditure reached its peak in the 30 to 49 age group, when on average households spent £170 per week on housing, with mortgage payments comprising almost half of this total. By contrast, in the 65 to 74 age group, total expenditure on housing was £69 per week on average, and mortgage payments represented 9 per cent of the total.

For people in the 65 to 74 and 75 or over age groups, the two largest categories of housing expenditure were council tax/ domestic rates and maintenance, repair, alterations and improvements, which accounted for three quarters of the total between them.

Table 11.9 explores differences in expenditure patterns in 2010 between different types of retired household: those which are mainly dependent on state pensions and related benefits and other retired households (see: Retired households in the LCF). These groups are further divided into single person households and one man, one woman couples.

The Living Costs and Food (LCF) Survey defines retired households as those where the household reference person is over State Pension Age (SPA) which was 65 for men and increasing from 60 for women from April 2010, and economically inactive (neither working nor waiting to take up a job). Two categories of retired households are identified:

• retired household ‘mainly dependent on state pensions’ is one in which at least three-quarters of the total income of the household is derived from state pensions and related benefits.

• Other retired households are those which have more than a quarter of their income from other sources, such as private pensions, savings and investments.

Further information can be found in Family Spending 2011.

Table 11.9 shows that average expenditure of couples on goods and services where amounts spent are related to the number of people in the household (such as food, drink and clothing), is almost double the expenditure of single people on such categories.

By contrast, couples and single people spend similar amounts on housing (net) – excluding mortgage payments and council tax/domestic rates – fuel and power, because expenditure in this category is mainly determined by the characteristics of the household’s accommodation rather than by the number of people in the household. Thus, single people spend a greater proportion of the total than couples on housing (net), fuel and power.

Table 11.9 shows considerable differences between types of couple. Average total expenditure for ‘other retired’ couples (£397) is nearly one and a half times that of couples who depend mainly on state pensions and related benefits (£277). This difference does not translate into major differences between the absolute amounts spent on basic goods and services such as food and non-alcoholic drinks and housing, fuel and power.

However, ‘other retired’ couples spend considerably more than their counterparts on non-essential items such as recreation and culture, transport, and restaurants and hotels. As a result, couples who depend mainly on state pensions and related benefits spend a greater proportion of the total than ‘other retired’ households on basic goods and services such as food and non-alcoholic drinks (17 per cent of average weekly expenditure, compared with 14 per cent for ‘other retired’ couples) and housing, fuel and power (15 per cent, compared with 12 per cent).

These differences in expenditure patterns probably reflect differences in income, with couples who depend on state pensions and related benefits having tighter budgets than their ‘other retired’ counterparts.

Average weekly expenditure of ‘other retired’ single people (£214) is 33 per cent higher than that of single people who depend mainly on state pensions and related benefits (£161). Households which depend mainly on state pensions and related benefits spend a greater proportion of their total expenditure than ‘other retired’ households on basic goods and services such as food and non-alcoholic drinks and housing, fuel and power.

‘Other retired’ single people also spend more on non-essential items than those who depend mainly on state pensions and related benefits. However, the differences in non-essential expenditure appear to be smaller between the two types of single person than between the two types of couple, particularly for social activities.

This may be due to a difference of lifestyles among single people (compared with couples), or it may be a reflection of tight budgets for some groups of single people in the ‘other retired’ category who have not built up strong state pension entitlements or private pensions (see Pension Trends Chapter 12).